By Anne Friberg
Argentina tries to stabilize reserves by stemming capital outflow and by utilizing a Venezuela-like series of rule changes and delay tactics.
In late 2011, Argentina began to have significant concern about the state of its reserves and the stability of the peso. This was because of significant capital flight brought on by high inflation and a general lack of confidence in the direction of the country. Consequently the government, under the newly re-elected Cristina Fernández de Kirchner, decided to take what looked alarmingly like a page straight from the Venezuela playbook on FX controls.
In an effort to stem the outflow, new rules were introduced to tighten restrictions on foreign-exchange purchases (and for dramatic effect, some rather draconian enforcement steps were taken, like money-sniffing dogs on the border to Uruguay, for example).
These developments warranted a discussion with members of The NeuGroup’s Latin American Treasury Managers’ Peer Group (LATMPG) at their winter 2012 meeting in January. Most of the member companies in the group either import or manufacture locally—or both—and are thus affected by FX controls when remitting dividends, royalties or payments for imports.
A member of the group kicked off the session by sharing what had happened to his company on ”the path to exchange controls.”
Before going into the changes that took effect on October 31, the presenting member, the LatAm treasurer of a US consumer goods company, highlighted what the situation was at the time Argentina decided to take action against capital flight, which according to some reports amounted to $3bn monthly. The gist of the rule framework was that FX requests had to be approved by the Central Bank; import proceeds had to be nationalized in 180 days and the maximum amount to send to an offshore cash pool was set at $2mn per month—assuming the company had no overdue foreign payments.
A whiff of venezuela
With the announced rule changes, it appeared the government was taking its inspiration from the restrictive FX controls that have characterized Venezuela under President Hugo Chávez. For example, mining companies were “requested” to bring back and convert their offshore stashes of US dollars into local currency, and
rumors circulated that the Central Bank would not approve any USD conversion for royalties and dividends. In addition, a new rule required that 10 days’ worth of projected cash outflows (remittance requests, in effect) be submitted in advance. Most telling was that one of the LATMPG member companies actually received a phone call from the Ministry of Finance immediately after submitting a request for a large USD payment, with a request that they delay the payment by a week; they received another similar request soon after.
Clearly, the finance ministry has been keeping very close tabs, via the banks and the Central Bank, on who was planning remittances, for what and
how much. They then applied pressure where required to limit or delay remittances. With around 170 large companies accounting for approximately 80-85 percent of Argentina’s imports, the authorities knew exactly whose companies’ approval requests to keep a lookout for. And the message could not be clearer: tread carefully to maintain good relations with the government and its agencies.
ADDITIONAL RULE CHANGES
Coupled with the short-term restrictions (or delay requests) and submissions of advance payment plans (in late December the advance notice required was extended from 10 to 30 days’ worth), the government also started to “request” that companies balance ARS-to-USD cash conversion coming from imports and generated from local sales with incoming dollars from exports.
Ideally, from Argentina’s point of view, this should be achieved by more local manufacturing of goods, like electronics assembly—something that is promoted in areas like Tierra del Fuego in the south via protectionist policies coupled with high import duties and import licensing requirements. In early January, in yet another effort to slow down imports and the currency conversion process, a new requirement for companies arose, calling for pre-authorization before preparing a purchase order for imports.
TREAT ARGENTINA LIKE VENEZUELA
While LATMPG members worry that Argentina could be turning into another Venezuela, there is still reason to believe all is not lost; one of the members thought that “the big difference between the two countries is that in Argentina the economy is growing pretty healthily, unlike Venezuela.” Longer term, however, the requirement to balance imports and exports will force companies to manufacture more locally or reduce imports to achieve the balance—neither of which is currently a particularly attractive option. Repatriation of royalties and dividends will also continue to be a concern, as it already has been in Venezuela for years.
In dealing with Argentina’s new reality, companies should plan treasury actions there as if the country could descend to Venezuela levels of business-unfriendliness, meaning:
Overall strategy: Play by the government’s rules, and reduce USD on the balance sheet via both the payables and cash side.
Execute. Speed up conversions and repatriations where possible. One member has seen that the transparency provided by submitting planned conversion requests in advance has made approvals “slightly easier” to get.
Next steps: Plan “á la Venezuela,” i.e., be prepared for a deterioration of the situation; potentially beef up local treasury to deal with additional documentation.